EARNINGS TEST IS OBSOLETE, BASED ON FALLACY; DEPRESSION-ERA BELIEF BEHIND REDUCED SOCIAL SECURITY FOR WORKING SENIORS.

Byline: GARY M. GALLES Local View

There was at least one small proposal (i.e., not involving trillions of dollars) in President Clinton's state of the union address that got support from both sides of the aisle: ``We should eliminate the limits on what seniors on Social Security can earn.''

President Clinton was proposing to eliminate the Social Security Earnings Test, which limits the earnings of retirement-aged workers before their Social Security benefits are reduced, rather than phasing in a relaxation of its bite, as is now scheduled.

Eliminating the earnings test, which pushes many productive older workers into what amounts to involuntary retirement, is long overdue.

The reason the Social Security Earnings Test now pushes workers into retirement is that, combined with other taxes, it exposes even moderate income older workers to outrageous tax rates on their earnings. This punitive taxation gives them a virtual mandate to retire, which discards much of the huge human capital stock of knowledge, talents and energies veteran workers represent. Further, it may pick the government's budget pocket as well.

It is long overdue for both seasoned workers and the economy. We should not just erode this relic, but end it altogether.

Under the earnings test, until they reach 70, workers who begin receiving Social Security benefits at 65 now must give up 33 cents of those benefits for each dollar they earn over a ceiling amount ($14,500 in 1998), and those who retire earlier, at 62, face a lower limit and an even higher 50 percent benefit reduction rate (although a delayed retirement credit partly offsets this by increasing continuing workers' future benefits). In other words, it is a 33 percent to 50 percent tax rate on additional earnings that applies until Social Security benefits are exhausted.

By itself, the earnings test subjects retirement-eligible workers to among the highest tax rates in the country. But they must pay other taxes, as well, including any state and federal income taxes on those earnings; the Social Security and Medicare taxes they continue to pay; and the implicit tax of additional work-related expenses (6 percent to 13 percent of earnings, in most cases). Increasingly, many also are being forced to pay income taxes on most of any Social Security benefits that remain.

Combined, these add up to overwhelming tax rates, which commonly make it prohibitively costly for many people to continue working once they are eligible for Social Security. Small wonder so few older workers remain in the labor force (about 17 percent of men 65 or older, compared with more than 45 percent in 1950), when fishing pays about as well as working.

The earnings test was based on the Depression-era fallacy that fewer jobs for older people meant more jobs for others. It persists today because without it, while older workers who stay in the labor force would actually get the Social Security benefits they are otherwise entitled to, some fear it could leave fewer dollars for recipients who do not work or higher payroll taxes for everyone else.

This belief still forms the only real basis for opposition to rolling back or eliminating the earnings test. However, this concern is far smaller than many fear. Some studies have concluded that even eliminating the earnings test would generate more government revenues than it costs in increased benefits, and more so, the longer people have to respond to the change. It would do so by sharply improving older workers' incentives and ability to remain productive, therefore increasing their output and earnings, increasing the revenues generated by the taxes that remain.

Workers aged 65 through 69, no longer facing an extra 33 percent earnings-test tax, would work more, generating added payroll and income tax revenue. The same holds for those wishing to work beyond 70, because they would no longer be forced to retire at 65 or younger, eroding job skills and recent employment experience to the point where re-employment is out of the question.

Eliminating this retirement deadline would also increase the market returns to investing in job skills and work effort for older workers not yet retired. It would make both them and their employers more willing to make such investments, by extending the pre-retirement payoff period for recouping such investments, which everyone involved knows is made artificially short by the earnings test.

As a result, it would also eliminate a major policy-induced incentive to discriminate against older workers. This would generate higher levels of productivity, output and income for these workers, even though they are not yet eligible for Social Security, and greater tax receipts to match.

Because eliminating the earnings test will generate additional earnings for these groups, it will generate more spending as well. Filling the new demands created will generate increased output, jobs, and income for others, and taxes for all levels of government.

The strength of the logic and evidence against the Social Security Earnings Test is compelling. Ending it will certainly improve the economy and the well-being of productive older workers, and may actually improve the government's fiscal position, as well. It is already scheduled to be relaxed in the future (eventually raised to $30,000 per year next decade), but it should be retired now, instead of forcing retirement on mature workers who wish to continue working. They can teach us a few things with what they know and what they can do, if only we will let them.